Capital Markets

Comeback for the 30-Year Treasury Bond?

The U.S. government has a lot of debt maturing in the next few years, much of it short term; the prevailing sentiment is that now would be a good t...
Stephen TaubMay 5, 2005

The Bush Administration announced that it will decide in early August whether to revive the 30-year Treasury bond, which it has not issued since 2001, the most recent year the United States ran a budget surplus.

That surplus has since turned into a deficit — due to the bursting of the 1990s market bubble, the subsequent recession, anti-terrorism spending, and tax cuts, among other reasons — and the national debt has swelled to $7.75 trillion, according to the Associated Press.

Meanwhile, the Treasury has a lot of debt maturing in the next few years, much of it short term. PIMCO bond guru Bill Gross stated on CNBC that the average life of the outstanding debt is between four and five years.

Many big investors want longer paper; the longest that Treasury now sells is a 20-year inflation-indexed bond. “Our pension funds need this kind of thing, our insurance companies need this kind of thing, our international competitiveness as the premier financial center of the world needs this kind of thing,” Neal Soss, chief economist at Credit Suisse First Boston, told Bloomberg.

The prevailing sentiment is that now would be a good time to lock in long-term financing, given the recent rate increases as well as signals from the Federal Reserve that more may follow.

The government’s announcement sent prices on existing 30-year bonds tumbling to their biggest drop in almost two months, according to Bloomberg. (Quite a contrast from the time of the original, 2001 announcement, when an economist for Goldman Sachs & Co. gave his firm an insider tip worth $3.8 million. He eventually pleaded guilty to several charges and was sentenced to 33 months in prison.)

The announcement’s impact on the corporate bond market is not yet apparent. It would, of course, introduce competition for 30-year corporates, which could force issuers to offer a few extra basis points to entice investors.

Yesterday, one corporate issuer that fared well was General Motors. The automaker saw the spread to comparable Treasurys narrow by 27 points for its 8.375 percent bond due 2033 and the spread narrow by 30 points on the 8.0 percent bond due 2031, according to MarketWatch. The reason for this strength, of course, is primarily that Kirk Kerkorian’s Tracinda Corp. plans to buy as many as 28 million GM shares.

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